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March 2010

Richard Curtis on
Publishing in the 21st Century

From
Mastering the Business of Publishing

by Richard Curtis

Originally published by E-Reads

CHAPTER 25

Audits

MOST BOOK PUBLISHERS' contracts have provisions granting authors the right to examine the books and records of their publishers under certain conditions: i.e., the examination must take place on the premises of the publisher during normal business hours; no more than two audits may be conducted in any given year; an audit must be commenced within a reasonable time after the issuance of the royalty statement in question; the records on any given book shall not be examined more than once; the publisher is not required to keep records on a book for more than a certain period of time, etc.

Although, I am told by one accountant, examinations of publishers' accounts are on the rise, invariably these have been conducted by authors with lucrative contracts. I can say with certainty that the vast majority of authors has only the vaguest notion of what is involved in an audit. Perhaps we can rectify that problem here. Harder to rectify is the somewhat bovine attitude on the part of many authors that their contracts are too small to merit auditing, and the royalties to be liberated by an examination of a publisher's books would not be worth the cost, which can run to a thousand dollars a day or more.

These assumptions are not necessarily correct. While a publisher's profits from midlist and category books are indisputably smaller than those from best-sellers, the total profits from the former can be immense by virtue of the fact that there are so many more of them on publishers' lists than there are best-sellers. And because most best-sellers are by established big-name authors, the huge royalties they earn are usually paid in advance, giving publishers little leeway to reserve royalties, whereas publishers commonly hold at least half the royalties collected on midlist and category books for which modest advances are paid.

If collective audits of such routine books could be undertaken, thus spreading the cost per author, they might well yield a surprisingly good return on the authors' investment in an accounting firm. More important, such group audits would keep publishers honest by exposing questionable accounting practices. It is therefore heartening to note that some author and agent organizations are sponsoring such group audits or making funds available for them. Because your book, or books similar to yours, might be spotlighted by an audit, you might want to tag along with the C.P.A. for a visit to a publisher's ledgers.

Before we embark, we ought to discuss just what gives us the right to audit a publisher, anyway. As I said at the outset, many publishers grant that right in the boilerplate language of their contracts. Certainly, every author or agent negotiating a book contract should insist on an audit provision. But if it is absent from a contract through oversight or design, or if a publisher refuses to grant that right to an author, does that necessarily rule out the possibility of an audit? Not according to the attorneys and accountants I have spoken to. They maintain that any licensor whose contract calls for royalties is entitled to examine the statements and supporting data of the licensee. Therefore, whether your contracts stipulate that right or not—indeed, even if you've been so foolish as to waive that right—your publisher cannot legally prohibit you from auditing his books. He can make it extremely difficult: he can postpone and stall, he can "misplace" and "lose" documents, he can subject your accountant to unpleasant conditions—a monastic cell with a hard chair, rickety table, and one flickering taper. But he must, ultimately, let your accountant go over the books.

Within recent memory there were some shady publishers who did that sort of thing, but happily they were driven out of business by their legitimate competitors. Today, while some publishers are frugal with their hospitality toward accountants, many shrug and say, "Come on in, we have nothing to hide."

Assuming your publisher is cooperative, the first step is for the accounting firm to make an appointment. The accountants will have examined the author's contract and all royalty statements from publication date to the present and will use these as the jumping-off point for their investigation. They will then request the printer's affidavits stating how many copies of the book were run off, along with information about damaged or destroyed copies. They will, of course, expect affidavits for all printings of the book. If there has been more than one printing, the accountants will want to know if the cover price of the book was raised.

Then the accountants will examine the records pertaining to distribution of the books, either to wholesalers or directly to book chains. The number of copies distributed plus the number of copies left in the warehouse plus the number of copies damaged, destroyed, or given away for free should add up to the number of copies printed. If they don't, suspicion will certainly be aroused that the publisher printed copies he has not reported.

The next critical source of information is copies returned. In hardcover publishing, the books themselves are returned to the publisher for credit, and counting these, while tedious, is not as stupefying a task as counting returned paperbacks, for the dimensions of hardcover printings and distributions are nowhere near those of paperback. In paperback publishing, however, returns are usually effected simply by stripping the covers off the bound books and returning the covers to the publisher's warehouse, saving the substantial cost of shipping whole books back whence they came.

Obviously, the job of counting paperback covers, which even for a modest-sized publisher number in the hundreds of thousands each month, is impossible to do by hand. Modern paperback houses handle the problem by printing product codes, those black-and-white coded bars similar to those you see on canned and packaged goods at your grocery store, on the backs of their book covers. The stripped covers are fed through machines that read the codes and compute title, author, list price, number of copies returned, and other data.

We now have all the information we need: number of copies printed, number of copies distributed, and number of copies returned. But there is still a gap between what the author feels is owed him and the actual amount of royalties he has been paid. That gap is the royalty on the number of copies the publisher has reserved against returns. As most authors now know, publishers create such reserves in order to give credit to distributors and stores that might return copies of books in the future. The reserve is determined by the executives who run the publishing company, and while it is to be hoped that these individuals will base their judgments on experience, reasonable evaluations of market conditions, and common sense, the existence of this tempting pool of undisbursed money has a tendency to cloud executive judgment, particularly in the pressure cooker of corporate bottom-line expectations.

Here, then, is the answer to the commonly asked question, "Is it possible for print, distribution, and return figures to be falsified?" The answer is, not without enormous difficulty, for it is neither safe nor practical to do so. For that to happen, the entire publishing organization—the clerks who document the printing and distribution information and count the returned covers, the bookkeeping and accounting departments of the publishing company, and the staffs of the printer and distributor—would have to be in on the conspiracy and sworn to secrecy. That is plainly preposterous: there simply isn't enough profit in the publishing business to make such wide-scale corruption worthwhile.

It is also completely unnecessary, because the same results are achieved by the decision of a handful of publishing officers to fix reserves against returns at an excessively high level. And it's all perfectly up-and-up from the publisher's viewpoint, because the establishment of reserves is a business judgment that may be argued but cannot be cited as fraudulent—unless one takes the position that the entire system is a license for publishers to earn interest at the expense of authors.

No, my observation is that print, distribution, and return information are not falsified, at least not in a way that could be described as deliberate and systematic. It would be closer to the truth to say that publishing bookkeeping is subject to the same goofs as the bookkeeping of any other industry. And though it may seem that the errors always fall in favor of publishers, the accountants I've spoken to state that as many fall in the authors' favor. Thanks in good measure to the consignment method of selling books, publishing bookkeeping is far, far more complex than it has to be, and that makes it a breeding ground for error.

One of the standard provisions of every audit clause in book contracts is that if errors of more than a certain amount, usually 10 percent of the sum stipulated in the publisher's royalty statement, are found by auditors, the publisher pays for the cost of the audit. Such a provision might make it tempting for authors who feel shortchanged by their publishers to hire an accountant, figuring the accountant will certainly be successful in detecting an excessive reserve against returns and get at least 10 percent of that reserve released. Thus the publisher would be required to pay for the audit, right?

Wrong. A high reserve against returns may not be considered an error. It's merely—in the publisher's eyes at least—a judgment call, a prediction or anticipation that a certain number of copies will be returned. Anybody contemplating an audit of his publisher's records should therefore be prepared not to recoup his accountant's fees from the publisher. Released royalties might defray or pay for the audit, but the publisher will stoutly maintain that no bookkeeping error was made.

Is there some alternative to hiring an accountant to find out whether your publisher is giving honest weight? Well, if you can prevail on your publishers to furnish you with information about the number of copies printed, distributed, and returned, you need nothing but a pencil and paper and a grade-school math education to figure out whether you have collected everything that is due you, and what the reserve against returns is. Then it's simply a matter of arguing with your publisher over the propriety of holding so much reserve money, or holding it for such a long time. The problem is getting that information: if publishers wanted you to have it, they'd put it up front routinely in their royalty statements. With persistence, however, you or your agent or your lawyer will be able to secure the information.

After reviewing it, however, you may feel in your bones or have other reason to believe that the figures furnished to you are incorrect, that your publisher printed or distributed more copies than he's told you, or took in fewer returns. You will then have to hire a professional accountant to examine the publisher's books, as the job is too complex and time consuming for untrained individuals. This is especially true if there is reprint, book club, foreign translation, or other subsidiary rights revenue—another very common source of bookkeeping errors among publishers but one that space prohibits me from analyzing in detail.

Some agents are able to build into book contracts provisions requiring publishers to furnish details of printing, distribution, returns, and reserves against returns in royalty statements, or copies of contracts and statements from sublicensees, such as book clubs and reprinters. For many agents and authors, however, it is futile to attempt to make publishers comply with such demands. This can only be achieved by collective action on the part of a determined, organized, and fearless cadre of professional writers or agents.

CHAPTERS 26

Never the Twain

MOST AUTHORS HAVE a simplistic notion about how books are marketed and sold to the movies. Their impression is that it their literary agent, operating alone or with a Hollywood co-agent, submits a book to producers until he finds one who likes it enough to make an offer, the same way that book agents submit manuscripts to publishers. In truth the process is maddeningly complicated and confused and can daunt many otherwise sophisticated New York literary agents. And while some agents have better movie and television track records than others, none has formulated a single and satisfying solution to the challenge of efficiently finding the right producer for movie or television adaptations of books.

The film business is by no means a monolithic industry where purchases are made by only a handful of companies. Completely to the contrary, the world we know under the umbrella term "Hollywood" is kaleidoscopically fragmented. Countless producers, bankrollers, screen-writers, actors and actresses, directors, agents, studio and network executives, and coattail riders scramble endlessly to assemble "packages" that will stay still long enough to get a property purchased, developed, produced, and released.

The New York literary agent, faced with this jumble of elements and claims, is all too often at a loss to know with any certainty what is genuine and what is dross, particularly because, as one learns after even brief exposure, the lingua franca of the movie business is insincerity. Unlike the publishing business, where if somebody says he owns the rights to a book you may be fairly certain he's telling the truth, Hollywood swarms with people selling things they do not own. I call it the Hollywood Hustle, and I can name on the knuckles of one finger the people out there who do not practice it in some form. Hey, it's not that hard. Suppose you want to make a movie, and the only things you need are a book, a screenwriter, a director, a cast, a distributor, and $20 million. You start the ball rolling by, let's say, asking the agent of a famous movie star if the star would be interested in a certain book if a deal could be put together for it. Of course, the agent is going to say maybe. That's good enough for you. You now go to a screenwriter, show him the book, and ask him if he'd like to adapt it, and of course, the screenwriter is going to say, sure, why not, if the price is right, who have you got to star in the movie? And you say, you're negotiating with this star. And if you have just enough of a track record so that anyone bothering to check your background doesn't reveal a complete fraud, and if you talk fast and knowledgeably, you just may be able to line up enough interested parties so that one or two actually sign. You can then make the rounds clutching that contract and get the others to sign as well. Congratulations! You've just gotten full screen credit as a producer!

The reason it's hard for a New York agent, even one possessed of highly sensitive baloney detectors, to sort out the truth is that the movie and television businesses are characterized by an ever-shifting flow of power, capital, and influence, and it is labor enough to keep up with the scramble of musical chairs in the publishing field, let alone that of movies and television. New York agents respond in any of a number of ways: they employ a movie and television specialist to operate out of their New York City offices; they engage independent specialists based in New York City; or they engage West Coast movie agencies.

It would seem that the last choice is far and away the best solution. That may have been so ten or twenty years ago, but I do not believe it is necessarily so today.

When I first came into publishing, the movie industry was still something of a definable, organic entity. A handful of powerful studios controlled the assembly of movie packages, and three networks controlled television programming. And because the field was more orderly, the role of the West Coast agent was, too. West Coast agents did in fact do for movie rights what East Coast agents do for book rights: they offered novels or original screenplays to movie producers and studio story departments, negotiated deals, took a commission, and remitted payment to the author or the author's literary agent.

As the 1960s and 1970s progressed, however, and the unified studio system gave way to one based on independent producers, artists, and sources of finance, the West Coast agents' approach shifted. They began accepting "talent," such as producers, directors, and actors, for representation. These clients sought the agents' help in negotiating their fees and acquiring literary or screenplay properties that they could produce, direct, or star in. Quite clearly, these agents were sailing into uncharted and very dangerous waters, for they no longer represented sellers only; they now also represented buyers as well, and in a growing number of instances they represented both the buyer and the seller of the same property or service. This is clearly a conflict of interest, because representation of buyer and seller makes it impossible for an agency to handle a negotiation at arm's length, as the legal phrase is.

The creature emerging from this broth was the agent-packager, a breed that assembles movie and television deals out of client components within each agency's own client list. The dilemma of which client to take the commission from—the buyer or the seller—was resolved by creating a "packaging fee" that is negotiated off the top of the total money available to finance the package deal. The net money after deduction of the packaging fee is then distributed according to the formula negotiated by the agent-packager with each client.

Students of power dynamics will realize that the distribution of these net monies, including those paid to authors for the rights to their literary properties, may be manipulated if not arbitrarily assigned by a shrewd agent (and West Coast agents are nothing if not shrewd). Indeed, the function of the West Coast agent-packagers seems to be identical to that of the old-time movie studios, with the exception that the agent-packagers do not actually distribute movies or air the television programs they package. To put it succinctly, the West Coast agent no longer represents the seller vis-à-vis the buyer; he is the buyer!

The New York literary agent surveying the West Coast scene sees arrayed before him a growing number of agent-packager-producers, and in due time it may dawn on him that these outfits are in competition with each other. Each West Coast agency has its own client list out of which the components for a deal are selected, and although those agencies do work out deals with one another in order to obtain the services of each other's clients, it can safely be stated that the desirable route is to cull the package entirely out of the agency's own stable.

What this means for authors and their New York literary agents is that West Coast agents are no longer as capable of thoroughly covering the movie and television markets, as they used to be. If you or your agent engage a West Coast agent to sell movie or television rights to your book or story, you should be aware that that agent may not be accepting the mandate with clean hands, to use another legal phrase.

Another reason New York agents don't always like to turn their properties over to West Coast agencies is that it means splitting a commission with them. On the average, New York agents charge 15 percent commissions on movie and television deals. If they let a West Coast agency make a deal for them, they'll have to give that agency at least half of their commission, and maybe more than half: some West Coast agents feel that because they do most of the work on such deals, they should get a higher percentage of the commission.

While many New York agents reason that 5 percent or 7.5 percent of something is better than 15 percent of nothing, the big numbers paid for movie and television rights can make an agent excusably greedy, and many therefore try to handle those rights themselves. It is not an easy task, for they must keep up with ever-changing industry buying patterns, personnel changes, news, and gossip, and in the movie business even more than in books, timing is critically important: you have to be there with the right property at the right time, and know the right person to call. Frequent trips to California may be necessary to meet and deal with the movers and shakers out there.

The fact that the movie studios, networks, and many major producers have New York offices, story departments, and scouts makes it seem easier for a New York literary agent to conduct movie and television business in Manhattan. To a degree that is true, but not to a sufficient degree. The New York offices of West Coast firms are good for expediting the submission of literary properties (and they're great for extending screening invitations to literary agents), but almost none has the authority to purchase or negotiate. Furthermore, it is not always desirable to give early looks at upcoming hot properties to New York scouts and story departments. In fact, it is often important not to let them get their hands on those properties. There is only a small number of studios and networks, and if they all "pass" on a property—turn it down—it will effectively be dead. A commonly held view of the people who read and screen properties for studios and networks is that they are not notable for their vision and imagination, and that they operate on the bureaucratic principle that it is safer to say no than yes.

Many New York agents therefore feel that it is much better to offer their properties to producers who can visualize a work's cinematic values and who have at their command the financing and industry connections to put together an impressive package that they can bring to studio and network brass. But which producers to offer those properties to? Aye, my friends, there's the rub, and it brings us right back to the desirability of going through West Coast agencies.

There simply doesn't seem to be a satisfactory answer, and perhaps the best that can be said for agents on the opposite coast is what is often said about people of the opposite sex: You can't live with 'em, and you can't live without 'em.

All the best,

Richard Curtis

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